When AIQ released StockExpert in 1987, the Expert Ratings were the foundation of the system. This release represented the first software product developed for personal computers that used Artificial Intelligence to signal equity movement. AIQ’s founder and knowledge engineer, Dr. J.D. Smith, chose to use expert system technology that was developed at Stanford University in the late 60’s. An expert system uses a knowledge based rule driven structure.
Dr. Smith tested hundreds of technical rules that had been published by respected analysts.Those rules that tested well were placed into a knowledge base of rules. Rules were weighted based on their effectiveness. When a series of bullish rules was triggered, an Expert Rating buy signal was generated. A series of bearish rules generated an Expert Rating sell signal.
In this video Steve Hill explains the internal rules of the Expert System that generated the signal
The sell signal that the AI system issued on April 18, 2019 presaged a 2000 point move down. Things have now changed. On June 4, 2019 the AI system issued a buy signal.
The major stock indexes fell about 5% in May and rebounded most of the loss in June so far in one week. Source: CNBC.com
CURRENT EVENTS INFLUENCING MARKET MOVEMENT:
Stocks fell because of the Chinese and the 5% Mexican tariff announcement. There will probably be a positive announcement on the Mexican tariff front as tariffs will hurt our economy and the auto industry. In a positive development, Fed officials said they would be open to reducing interest rates if the tariffs weaken the economy. The current interest rate on the ten-year bond has dropped from 3.2% on the ten-year bond to about 2.10% now just in roughly six months. The affordability of buying a new house has gotten much better.
Trump will do what he can to shore up the economy, and if the markets fall, he is keenly aware of stemming any significant decline in the stock market as he wants to be reelected. The jobs report was a little weaker than was expected; that is why the Fed may reduce interest rates to keep the economy on an upward trajectory consistent with a 2-3% per year growth in the GDP. Overall, I am still positive on the economy unless full tariffs are enacted on the Mexican and the Chinese economies.
If they are expanded to the 25% fully enacted, I will be getting more cautious on the economy and the stock markets.
INTEREST RATE SCENARIO
The Federal funds rate is about 50 basis points or half of 1% higher than the two and five year Treasury Notes and has historically indicated that a recession is looming. The next few months will indicate whether the economy will soften. At this point, I don’t think it will decline as much as to go into recession, but there are still risks. Trump will determine what will happen to the economy. If the tariff situation is resolved, then I think the economy will still be in a growth phase, but if the tariffs are not resolved and get worse, the risks of a recession will increase dramatically.
MARKET RECAP:
Last month on my May 5th Bartometer I said that if the S&P 500 closes below 2,886 I will get VERY CAUTIOUS and It did. After that, it proceeded to 2,740 a drop OF 5%, AND my computer models gave a BUY signal ON 6/5/19, the big up day at 2,800, and it rallied to an intraday high of 2,885.85 and closed at 2875. Even though we are on the BUY-HOLD signal, I would like the S&P 500 to break out of 2886, preferably the 2,893 level and stay there for 2 to 3 days for me to believe the rally can approach the old highs of 2,954. See the charts for an explanation.
Index Averages
Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until June 7, 2019.
*Dow Jones +12.50% S&P 500 +15.60% NASDAQ Aggressive growth +17.50% I Shares Russell 2000 ETF (IWM) Small cap +12.97% International Index (MSCI – EAFE ex USA) +9.97% Moderate Mutual Fund +8.20% Investment Grade Bonds (AAA) +7.03% +2.64% High Yield Merrill Lynch High Yield Index +7.39% +4.26% Floating Rate Bond Index +4.90% +2.60% Fixed Bond Yields (10 year) +2.10% Yield 2.63%
The average Moderate Fund is up 8.2% this year fully invested as a 60% in stocks and 40% in bonds.
If interest rates are peaking and look to be flattening or declining over the next year then investment grade or multisector bonds technically might be better than floating rate bonds. But diversification is important.
The S&P 500
Source: AIQ Systems
The S&P is above. Last month AIQ gave a SELL signal on April 18th but I went to a VERY CAUTIOUS the close below 2,886. The S&P dropped 5% after it closed below 2,886.
My models went to a BUY signal at 2,800 on 6/05/2019 the S&P now we are right back up to 2,875. Where do we go from here? If the 2,893 level can be broken on the Upside which I think it can and stay there for 2-3 days , then the S&P should approach its old high of 2,954 it hit on May 1, 2019. Notice the graph below the S&P. This chart is the SK-SD stochastics, it is breaking out on the upside and it shows the market is oversold and could continue to rally.
Source: Investopedia
*A Support or support level is the level at which buyers tend to purchase or into a stock or index. It refers to the stock share price that a company or index should hold and start to rise. When a price of the stock falls towards its support level, the support level holds and is confirmed, or the stock continues to decline, and the support level must change.
Support levels on the S&P 500 area are 2865, 2811, 2740, and 2683 areas. These might be BUY areas.
Support levels on the NASDAQ are 7704, 7414, 7291, and 7171.
On the Dow Jones support is at 25,943, 25739, 25,538 and 25,376. These may be safer areas to get into the equity markets on support levels slowly.
RESISTANCE LEVEL ON THE S&P 500 IS 2885. If there is a favorable tariff settlement, the market should rise short term.
THE BOTTOM LINE:
The S&P 500 is right at the point where it needs to break out of 2,893. I am still Moderately Bullish on the market and think it will break out. My computer technical models are on a short term buy signal, so do I think the S&P will breakout above 2,954, the old high it hit on May 1, 2019? We will see, but if it approaches that level, it will be imperative to watch the 2,954 level to see if it turns down. I will be watching that level to see if it is a breakout. If it cannot, then I would become Cautious again.
Best to all of you,
Joe Bartosiewicz, CFP® Investment Advisor Representative
5 Colby Way Avon, CT 06001 860-940-7020 or 860-404-0408
Contact information: SECURITIES AND ADVISORY SERVICES OFFERED THROUGH SAGE POINT FINANCIAL INC., MEMBER FINRA/SIPC, AND SEC-REGISTERED INVESTMENT ADVISOR.
Charts provided by AIQ Systems:
Technical Analysis is based on a study of historical price movements and past trend patterns. There is no assurance that these market changes or trends can or will be duplicated shortly. It logically follows that historical precedent does not guarantee future results. Conclusions expressed in the Technical Analysis section are personal opinions: and may not be construed as recommendations to buy or sell anything.
Disclaimer: The views expressed are not necessarily the view of Sage Point Financial, Inc. and should not be interpreted directly or indirectly as an offer to buy or sell any securities mentioned herein. Securities and Advisory services offered through Sage Point Financial Inc., Member FINRA/SIPC, and SEC-registered investment advisor. Past performance cannot guarantee future results. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented in this letter should only be relied upon when coordinated with individual professional advice. *There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market. The price of commodities is subject to substantial price fluctuations of short periods and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated, and concentrated investing may lead to Sector investing may involve a greater degree of risk than investments with broader diversification. Indexes cannot be invested indirectly, are unmanaged, and do not incur management fees, costs, and expenses. Dow Jones Industrial Average: A weighted price average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. S&P 500: The S&P 500 is an unmanaged indexed comprised of 500 widely held securities considered to be representative of the stock market in general. NASDAQ: the NASDAQ Composite Index is an unmanaged, market-weighted index of all over the counter common stocks traded on the National Association of Securities Dealers Automated Quotation System (IWM) I Shares Russell 2000 ETF: Which tracks the Russell 2000 index: which measures the performance of the small capitalization sector of the U.S. equity market. A Moderate Mutual Fund risk mutual has approximately 50-70% of its portfolio in different equities, from growth, income stocks, international and emerging markets stocks to 30-50% of its portfolio indifferent categories of bonds and cash. It seeks capital appreciation with a low to moderate level of current income. The Merrill Lynch High Yield Master Index: A broad-based measure of the performance of non-investment grade US Bonds MSCI EAFE: the MSCI EAFE Index (Morgan Stanley Capital International Europe, Australia, and Far East Index) is a widely recognized benchmark of non-US markets. It is an unmanaged index composed of a sample of companies’ representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends. Investment grade bond index: The S&P 500 Investment-grade corporate bond index, a sub-index of the S&P 500 Bond Index, seeks to measure the performance of the US corporate debt issued by constituents in the S&P 500 with an investment grade rating. The S&P 500 Bond index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large cap US equities. Floating Rate Bond Index is a rule-based, market-value weighted index engineered to measure the performance and characteristics of floating rate coupon U.S. Treasuries which have a maturity greater than 12 months.
Everyone has heard about trend-following. And most traders have at least a foggy grasp of the relative pros and cons associated with trend following. And anyone who has ever employed any type of trend-following technique is aware that they are great when there is an actual trend, but that whipsaws are inevitable.
What I am about to show you will not change these facts. But today’s piece is just a “quickie” to highlight an obscure way to use a common indicator as a “confirmation/ denial” check when assessing the trend of a given security. For the record, I am making no claim that this indicator generates profitably “trading signals in and of itself. Its one of those things that – and I hate this phrase as much as you do but – should be used in conjunction with other indicators to get a good sense of the current “state of the trend” for a given security.
Nothing more, nothing less.
MACD Stretched Long
Most traders are familiar with the MACD indicator. Originally popularized by Gerald Appel, it uses a set of moving averages to attempt to assess the trend in price (and many traders also use it to try to identify overbought or oversold situations). Standard parameters are 9,26 and 12. The version I use is different in several ways:
*Whereas the standard MACD generates two lines and a histogram can be drawn of the difference between the two, this version just generates one line – we will call in the trend line (catchy, no?)
*We will use parameters of 40 and 105
*One other note is that (at least according to me) this indicator is best used with weekly data.
The MACD4010501
Here is the formula for AIQ TradingExpert Expert Design Studio:
Define ss3 40.
Define L3 105.
ShortMACDMA3 is expavg([Close],ss3)*100.
LongMACDMA3 is expavg([Close],L3)*100.
MACD4010501Value is ShortMACDMA3-LongMACDMA3.
As I said this should be used with “other” indicators. For example, one might consider the current price versus a 40-week moving average.
Standard Interpretation:
*If price is above the 40-week moving average (or if whatever other trend-following indicator you are using is bullish), AND
*The MACD4010501 is trend higher THEN
ONLY play the long side of that security
Likewise:
*If price is below the 40-week moving average (or if whatever other trend-following indicator you are using is bearish), AND
*The MACD4010501 is trend lower THEN
ONLY play the short side of that security (or at least DO NOT play the long side)
Finally, DO NOT assume that every change of trend in MACD4010501 is some sort of buy or sell signal. Consider it only as a filter for your trades.
Some random examples appear in Figures 1 through 4 (click to enlarge any chart)
To repeat, the proper use of this obscure version of the popular MACD indicator is as follows:
*Consider the trend of MACD4010501
*Consider one or more other trend-following indicators
*If there is bullish agreement, then apply your own shorter-term entry and exit techniques to trade the long side.
*If there is bearish agreement, then apply your own shorter-term entry and exit techniques to trade the short side (or simply stand aside).
Trade on!
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
While I am by and large an avowed “trend-follower” I also recognize that sometimes things get beaten down so much that they ultimately offer great potential long-term value. Or, as they say, “every dog has it’s day.” So, let’s consider some “dogs”.
For the record, and as always, I am not “recommending” these assets – I am simply highlighting what look like potential opportunities.
Dog #1: Soybeans (ticker SOYB)
As I wrote about in this article, soybeans are very cyclical in nature. According to that article there are two “bullish seasonal periods” for beans and one “bearish”:
*Long beans from close on the last trading day of January through the close on 2nd trading day of May
*Short beans from the close on 14th trading day of June through the close on 2nd trading day of October
*Long beans from the close on 2nd trading day of October through the close on 5th trading day of November
In Figure 1 (ticker SOYB – an ETF that tracks the price of soybean futures) has been beaten down quite a bit. This doesn’t mean price can’t go lower. However, given the cyclical nature of bean prices they probably won’t go down forever.
In this article and this article, I wrote about the prospects for uranium and ticker URA – an ETF that tracks the price of uranium. Since that time URA has basically continued to go nowhere. As you can see in Figure 3, it has been doing just that for some time. While there is no guarantee that the breakout out of the range indicated in Figure 2 will be to the upside, historically, elongated bases such as this often lead to just that. A trader can buy it at current levels and put a stop loss somewhere below the low for the base and take a reasonable amount of risk if they are willing to bet on an eventual upside breakout.
Figure 3 – Ticker URA with a long (really long) base (Courtesy AIQ TradingExpert)
Dog #3: Base Metals (Ticker DBB)
Under the category of – I called this one way, way too soon – in this article I wrote about the potential for ticker DBB to be an outperformer in the years ahead. As you can see in Figure 4, so far, not so good.
*In Figure 3 is this article you can see that commodities as an asset class are due for a good move relative to stocks in the years ahead.
*In addition, the Fed is raising interest rates.
As discussed historically base metals have been the best performing commodity sector when interest rates are rising. Ticker DBB offers investors a play on a basket of base metals.
Summary
Will any of these “dog” ideas pan out? As always, only time will tell. But given the cyclical nature of commodities and the price and fundamental factors that may impact these going forward, they might at least be worth a look.
In the meantime, “Woof” (which – as far as I can tell – means “Have a nice day”).
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
In the interest of full disclosure, the reality is that I am not great at “predicting” things. Especially when it involves the future. That being said, I am pretty good at:
*Identifying the trend “right now”
*Understanding that no trend lasts forever
*Being aware of when things are getting a bit “extended”
So, I am going to highlight a few “thoughts” regarding how one might best be served in the markets in the years ahead.
Where We Have Been
*After 17 years of sideways action (1965-1982) the stock market has overall been in a bullish trend since about 1982 – albeit with some major declines (1987, 2000-2002 and 2007-2009) when the market got significantly overvalued.
*Bond yields experienced a long-term decline starting in 1981 and bottomed out in recent years.
*Commodities have mostly been a “dog” for many years.
The way the majority of investors approach these goings on is to:
*Remain bullish on the stock market (“Because it just keeps going up”)
*Continue to hold bonds (“Because I have to earn a yield somewhere”)
*Avoid commodities (“Because they suck – and they’re scary”)
And as an avowed trend-follower I don’t necessarily disapprove. But as a market observer I can’t help but think that things will be “different” in the not too distant future.
Considerations Going Forward
Stocks
Figure 1 displays the Shiller P/E ratio. For the record, valuation measures are NOT good “timing” tools. They don’t tell you “When” the market will top or bottom out. But they do give a good indication of relative risk going forward (i.e., the higher the P/E the more the risk and vice versa).
Note:
*The magnitude of market declines following previous peaks in the P/E ratio
*That we are presently at (or near) the 2nd highest reading in history
(click on any chart below to enlarge it)
Figure 1 – Shiller P/E Ratio (and market action after previous overvalued peaks) (Courtesy: www.multpl.com/shiller-pe/)
The bottom line on stocks: While the trend presently remains bullish, valuation levels remind us that the next bear market – whenever that may be – is quite likely to be “one of the painful kind”.
Bonds
Figure 2 displays the 60-year cycle in interest rates.
Given the historical nature of rates – and the Fed’s clear propensity for raising rates – it seems quite reasonable to expect higher interest rates in the years ahead.
Commodities
As you can see in Figure 3 – which compares the action of the Goldman Sachs Commodity Index to that of the S&P 500 Index) – commodities are presently quite undervalued relative to stocks. While there is no way to predict when this trend might change, the main point is that history strongly suggests that when it does change, commodities will vastly outperform stocks.Figure 3 – Commodities extremely undervalued relative to stocks (Courtesy: Double Line Funds)
The Bottom Line – and How to Prepare for the Years Ahead
*No need to panic in stocks. But keep an eye on the major averages. If they start to drop below their 200-day averages and those moving average start to “roll over” (see example in Figure 4), it will absolutely, positively be time to “play defense.”
Figure 4 – Major stock average rolling over prior to 2008 collapse (Courtesy AIQ TradingExpert)
*Avoid long-term bonds. If you hold a long-term bond with a duration of 15 years that tells you that if interest rates rise one full percentage point, then that bond will lose roughly 15% in value. If it is paying say 3.5% in yield, there is basically no way to make up that loss (except to wait about 4 years and hope rates don’t rise any more in the interim – which doesn’t sound like a great investment strategy).
*Short-term to intermediate-term bonds allow you to reinvest more frequently at higher rates as rates rise. Historical returns have been low recently so many investors avoid these. But remember, recent returns mean nothing going forward if rates rise in the years ahead.
*Consider floating rate bonds. Figure 5 displays ticker OOSYX performance in recent years versus 10-year t-note yields. While I am not specifically “recommending” this fund, it illustrates how floating rate bonds may afford bond investors the opportunity to make money in bonds even as rates rise.
*Figure 6 display 4 ETFs that hold varying “baskets” of commodities (DBC, RJI, DJP and GSG clockwise from upper left). When the trend in Figure 3 finally does reverse, these ETFs stand to perform exceptionally well.
Figure 6 – Commodities performance relative to stock performance (GSCI versus SPX)
Finally, the truth is that I don’t know “when” any of this will play out. But the bottom line is that I can’t help but think that the investment landscape is going to change dramatically in the years ahead.
So:
a) Pay attention, and
b) Be prepared to adapt
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
